Grid of the Future Industry of the Future The Evolution of Alberta s Energy Markets September 20th, 2017 Dr. Ren Orans Managing Partner, E3
GRID OF THE FUTURE
Theme Broad changes are sweeping through society that will have lasting impacts on the electricity sector 1. Technology : Technological change in data processing, communications and manufacture are making new technologies available and cost-effective 2. Policy : Climate change and the need to decarbonize our economy will require the development of massive quantities of low-carbon electricity 3. Democracy : Consumers are increasingly wishing to take control of their own destiny, decentralizing the focus of decision-making The role of utilities will need to continue to evolve to respond to these changes in ways that preserve value for their shareholders and ratepayers
Technology
Renewables Solar PV costs have declined tremendously in the last decade Wind and solar are now cost-competitive with conventional resources in many markets even without subsidies! Solar PPA Prices Over Time Rooftop solar can be installed at below the embedded cost rate in some jurisdictions Source: Utility Scale Solar 2014 (LBNL, 2014)
Energy storage There is increasing interest in grid-connected energy storage for renewable integration and investment deferral Battery costs are declining rapidly with manufacturing scale-up and technology advances Lithium-ion appears to be following the photovoltaic path
IT and communications Smart devices and advanced communications networks provide new mechanisms to facilitate customer response Improved access to data and control systems will enable response to occur seamlessly and with little effect on consumer experience
Policy
Deep reductions in greenhouse gas emissions are called for globally The 2016 Paris agreement committed industrialized nations to 80% reductions below 1990 levels by 2050 Roughly consistent with IPCC/UNFCC goal of keeping global average temperature rise within 2 C to avert catastrophic climate change If current trends continue, 2 C aggregate warming will be exceeded Source: NOAA, https://www.ncdc.noaa.gov/monitoringreferences/faq/indicators.php Global annual average temperature measured over land and oceans. Red bars indicate temperatures above and blue bars indicate temperatures below the 1901-2000 average temperature. Source: IPCC Global Assessment Report 5, SPM.07
Economy-wide decarbonization requires four energy transitions 1. Efficiency and Conservation 2. Fuel Switching 3. Decarbonize electricity 4. Decarbonize fuels (liquid & gas) Energy use per capita (MMBtu/person) Share of electricity & H 2 in total final energy (%) Emissions intensity (tco2e/mwh) Emissions intensity (tco2/ej) CCS 10
Three Sources of Low-Carbon Electricity 1. Renewable Hydroelectric: high-quality, low-carbon resource in the Northwest that can help to balance wind and solar power Wind: high quality resources in West, particularly East of the Rockies, intermittent availability Solar: high quality resources across the Southwest, intermittent availability Geothermal: resource limited Biomass: resource limited 2. Nuclear 3. Fossil generation with carbon capture and storage (CCS)
One look at a GHG-compliant Pathway for California Resources selected by E3 s RESOLVE model to meet electric sector s share of 2050 GHG abatement goals Electric sector reduces emissions to 20 MMT by 2050 while serving higher loads from electrification of transportation, buildings and industry
Democracy
Consumer empowerment is resulting in a decentralization of decision-making Restructuring of the electric utility industry in the 1990s invited new entities into the industry Direct access (DA), electric service providers (ESPs), independent system operators (ISOs) Municipalization and communitychoice aggregation (CCA) allow local control of energy decisions Rooftop solar and demand response empower small customers More difficult to justify large, centralized infrastructure investments
Retail rate design from a utility perspective Utilities have traditionally viewed rate design as a part of the cost allocation/ratemaking process COSA study identifies classes of customers and allocates costs among them Rates are designed to collect the class-specific revenue requirement from the class as a whole Each customer pays a fair share of the utility s total cost A customer s bill should generally align with utility s cost to serve it, but some imprecision is tolerated due to pooled nature of costs, and to keep rate designs manageable for utility and customers Utilities think of rates in the same way politicians think of taxes!
Utility view is driven by structure of its embedded costs Vast majority of costs in utility rates today are fixed costs Utility capital investments form the rate base, a portion of which is recovered each year from customers based on depreciation schedules Electricity production and delivery requires significant capital investments Power stations Transmission lines and substations Distribution poles, wires and transformers Variable costs are only O&M and fuel
Traditional utility view has little room for customer response Rates are set as part of a careful, political process designed to produce equitable outcomes Customer response, also called bypass, upsets this balance Customers are motivated to minimize their bills through consumption decisions Direct access and net energy metering are the most extreme examples of this Utilities respond with fixed monthly charges and ratchet demand charges Economists prefer taxes that are nondistortionary, i.e., they do not change behavior of consumers or producers
Why should utilities want customer response? 1. Because customers want choice! Customers want to manage their bills and many want rooftop PV 2. Because there can be cost savings for the utility right now Utilities can avoid fuel and investment costs DER increasingly cost-effective 3. Because we will need customer response a lot of it in the long term Renewables integration and greenhouse gas reduction Resilience against major disruptions Innovation from new market entrants
INDUSTRY OF THE FUTURE
Initial thoughts Historically, we have planned and operated power systems assuming resources are flexible and load is inflexible Technology, Policy and Democracy are driving change through expansion of intermittent generation and enabling customer response Utilities are responding in states like California and New York by evolving their markets and business models
Will customer choice and innovation proliferate? Historic Electricity Industry Tomorrow s Industry? Rise of the prosumer; demand profiles diversify Relatively homogenous customers within each rate class Volatility and uncertainty handled via command-and-control regulation Generation mostly centralized Majority of costs recovered volumetrically in an era of continual load growth Volatility and uncertainty addressed via markets, increased consumer control over demand, and strategic regulation Generate a diverse mix of centralized and distributed technology, including storage, microgrids, and solar Usage and payment of the electric network/platform an open question
Implications for market participants Customers Utilities Transmission Developers Wholesale Markets IPPs Technology affords increasing opportunities to manage energy services and costs Continued pressure to become the utility of the future as Technology and Democracy make more monopoly services contestable Increased focus on integration of remote renewable resources and managing new flows and system changes Increasing value as a means to manage variable resources and facilitate customer response Times are tough now, but trend is still toward more competition with potentially more opportunity if the utility of the future is a skinny one
How will the grid of the future be organized?
What Happens to Utilities when Regulated Bundled Rates are used in Competitive Markets? They can experience uneconomic bypass of their monopoly services with increases in costs and rates. At the extreme, unmitigated cost increases lead to a death spiral that eventually leads to rate and market restructuring and the potential for stranded cost recovery proceedings Electricity deregulation has many similarities to cable industry Natural Gas Complete unbundling of both costs and functions created separate Pipelines, Marketers and Buyers Open seasons matched contract terms and anchor tenants with new investments Railroad Had inflexible and noncompetitive bundled regulated rates when trucking and airlines industry become deregulated; this created substantial amounts of uneconomic bypass Airline Also had highly regulated bundled rates (by distance) prior to deregulation and Sabre system implementation Telephone Opened up long distance common carrier service to all providers. Implemented multi-part rates, similar to what we are proposing 24
Technology, policy and democracy leads to many questions on the future of the grid E3 is active in examining grid modernization, utility business models, and rate reform in many jurisdictions Most notably in California, Hawai i, and New York Experience shows there is no one right path forward Each path must be tailored to a jurisdiction s unique circumstances Source: NC Clean Energy Technology Center
Several jurisdictions are pushing action on rate reform, grid modernization, and new utility business models E3 is particularly active in states such as New York, Hawai i, and California, but we work in every U.S. jurisdiction Top Ten Most Active States of Q1 2017 By Number of Actions Most Common Types of Actions Taken in Q1 2017 Source: NC Clean Energy Technology Center 26
How will distribution utilities and markets operate in the future? Distribution Utility and Market Evolution DSO? DSP? DO? There are many different and valid ways to think about how the electric distribution system will operate in the future 1. DO = Distribution System Owner/Operator 2. DSP = Distribution System Platform 3. DSO = Distribution System Operator Virtual vs. Real = Tariff-based pricing vs. bid-based markets Source: New York Joint Utilities Supplemental Distribution System Implementation Plan (SDSIP)
Fundamental Pricing Signals seconds minutes hours Pricing and retail market design are key considerations as technology, policy, and democracy advance Frequency regulation Volt/VaR regulation Spinning reserves Emissions Spinning reserves Energy Emissions Energy Emissions Today s Utility Regulated Monopoly Wholesale Markets Limited DER Penetration / Retail Markets Future Utility New Business/ Operating Model? More Active Customers + New Technologies? Transformed Markets? months years Capacity Generation Capacity Generation Transmission Distribution Average rates and blunted price signals: Average /kwh Flat $/kw More accurate and dynamic pricing signals: Dynamic /kwh? Variable $/kw? Other billing determinants?
A smart multi-part dynamic retail rate or tariff is one pricing solution that also serves to create a virtual retail market Existing rates and tariffs do not effectively encourage dispatchable or high value DERs nor do they allow for efficient recovery of utility costs A multi-part dynamic rate or tariff can work in tandem with other utility or state programs and it can also accommodate various public policy and regulatory goals This offers utilities in jurisdictions like the Pacific Northwest the opportunity to create virtual retail markets based on rates and tariffs rather than entirely new distribution level markets Energy and other products/services to the grid? Part 1: Embedded Costs Customer Charge Part 2: Embedded Costs Network/Grid Access Charge Part 3: Marginal Costs Value-Based Charge/Payment Energy and other products/ service to the customer? $/customer? Other? $/kw, $/kwh? Other? $/kw, $/kwh? Other? 29
New York example of dynamic pricing in a distribution constrained area Hourly prices by component, sub-station capacity limit and loads Only these components are credited for exports for selfgeneration Public purpose and utility embedded costs
NY Full Value Tariff: Network Subscription Choices More Economically Efficient Less Economically Efficient 1. Coincident peak at each level of system (distribution, transmission, system) 2. Maximum demand in a peak period that includes the coincident peak (e.g: July 6 9pm) 3. Maximum demand in the peak month 4. Peak period demand in all months 5. Maximum demand in all months 6. Monthly usage in the peak month 7. Rolling maximum monthly energy 8. Average monthly energy 9. Energy Easier to Understand Harder to Understand http://www.ethree.com/wpcontent/uploads/2016/12/fu ll-value-tariff-design-and- Retail-Rate-Choices.pdf 10. Flat fee per customer (size independent)
What can a smart multi-part dynamic rate do? A multi-part dynamic rate has several innovations that can serve as tools to achieve diverse goals Enables Smart Grid Technologies Dynamic prices send technology agnostic signals to enable a whole host of DERs More Efficient Appliances Storage Smart EV charging Smart HVAC Smart Water Heaters Smart Inverters Innovative Pricing can Capture D Value D value of utility distribution and subtransmission translated to customers as prices to beat to enable DER participation, enabling equitable and economical management of grid costs Sources of value can be communicated in a variety of ways including hourly real-time price signals or utility program payments Enables Utility Business Model Change Rationalization of Rate Design Encourages creation of business models that can lead to greater customer adoption of high value DERs rather than DERs that have low, zero, or negative value Utilities can begin to offer new and different products/services Utilities may have better and more transparent fixed-cost recovery through a multi-part rate that has an explicit mechanism, potentially forestalling future issues with retail rates like net energy metering cost shifts The rate or tariff can be implemented rapidly or gradually, e.g. initially opt-in only E3 has proposed such a rate in New York, which served as the basis for the ConEd Smart Home rate available at: http://documents.dps.ny.gov/public/common/viewdoc.aspx?docrefid={a0bf2f42-82a1-4ed0-ae6d-d7e38f8d655d} 32
Key takeaways for the Alberta s Key Stakeholders There are many different and valid ways to think about how utilities and retail markets will be organized and operate in the future There is no one-size-fits-all solution and each jurisdiction will have to chart its own path balancing factors like: Size and value of potential DER and retail markets The costs of grid modernization and foundational investments needed to enable DER and retail markets Tailored and implementable transition strategies that address customer impact, utility business models, policy goals, and retail market competition concerns A good place to start might be what NY is calling virtual retail markets through utility offered dynamic rates/tariffs coupled with more operational control over DERs
Thank You! Energy and Environmental Economics, Inc. (E3) 101 Montgomery Street, Suite 1600 San Francisco, CA 94104 Tel 415-391-5100 Web http://www.ethree.com Ren Orans, Managing Partner (ren@ethree.com)